The Republican journal., 1887-06-23


not Indispensable, however, that the company
be free from the pressure of floating debt before
it may lawfully pay dividends even to holders of
its non-preferred stock. 1t may, even, under
some circumstances, borrow money to pay di-
vidends. MorawetZ, Cor. I'd cd, ! 43S. and
eases.
In many eases there is difficulty in ascertain
ing what the actual condition of 4 company
may be. None exists here. There could not
we'll be AN instance of less complicated affairs.
The business of the company is guaranteed. its
amount of income fixed. IFS expenses are NOM
ina, and its freedom fronLall liabilities and
risks usually incident to the management of a
railroad is assured, for the next thirty three
wears.
In every sense this last debt of $50. 900 is a
permanent debt. 1t is a bonded, mortgage and
Understanding debt. The lease secures it
many times over. The road itself is an absO-
lutte security for it. and undeniably for much
more. Ii is Il permanent debt for another rca-
son. II entered into the construction of the
road and is represented in its permanent prop
crtv. \ distinction between expenses for con-
>truction and ordinary expenses is maintained
in the leading eases on this subject. The argu-
ment is that capital paid in and capital borrow
ed unte;lly produced the earnings, and that ii
proportionate share of the earnings should be
accorded to each. - Maine, before cited. y.
4ai In that view the bonded debt earns but
$4,000 per annum of the S;s6,OO0 earned in all.
1t will be readily seen that there are special
REASONS lcf nec1llng the tOlnpIanalltS clalm
equitable They have been required to remain
in waitin" for dividends for many years, in or
der that Il large amount OF the Company's in
debtctness. LAY S230,000. should be first paid.
quite an eNa'ing construction against them be-
in@ required to produce such result. The COM
pany or its common shareholders would have
suffered no I'M u>tice had the debt to the city of
Belfast. been placed in ii permanent funded
form. Another thing. before spoken of. which
favors the conplainants. is, that 10y our former
opinion their dividends were held to he nom
cumulative. and if lost now are forever LOST.
Still another thing may he of Importance enough
TO be taken into account, and that is that the
corporation Is paying six per cent interest on
its bonds, and receives about onc-third interest
on the sums which il proposes to keep on hand.
The respondents 30 further than to DENY that
net profits have been or will be earned: they
contend that they should not be divided even if
they have been earned OF course. all the net
earnings OF an indebted company should not
always hc devoted to dividends. We think Il
company should have right to base its calcl,ia-
tons on final payment of its debts II, some
time. BAT steps in that direction are not to be
untiincly. OF oppressive to other interests, aud
should he such rs not TO unreaSonably interfere
with the expectations or interests of Stockhod-
crs. and such rs will not prevent a reasonable
performance OF all other obligations which have
been assumed by the company. The more
practical question is. a> 10 how far the earnings
shall he reserved and how far divided. But it
comes round to the primary question. which is.
have net profits been earned. such as are rca>-
onably applicable 10 dividends: The argument
Of the learned counsel for the respondents
seems TO proceed upon the idea that the COM
llalnaGts have prior right to receive diVd-
ends only Whenever they have been actually de-
eiarrd. but that the company have the right to
refuse TO declare dividends. whether they have
been earned or not. such is not the letter or
spirit of the contract entered into. The prom
Ise OF the company was. that dividends semi
annually from let earnings ''>haI be made
but when the present mortgage debt of SLOT
900 was established it was to he paid in twenty
Years. and shall it not be pai,l at the end of that
time, asks counsel: 1t may have been supposed
that twenty years would be long enough for
the debt TO run without Il renewal. But if it
was even supposed that the debt could be con-
Neniehtly paid at maturity without renewal.
was il not calculated by the parties that ,livil-
ends would he in the meantime distributed to
the preferred stockholders: The result only
proves Il characterization by the company of il,
ability to literally perform its obligations. ISit
an excuse for not declaring dividends out of
net earnings. provided there are net earnings
merely that company cannot pay an entire
bonded debt at maturity without creatin. new
debt or borrowing again: Is it not reasonable
to require the company I" keep all its obiya-
tl"n>, when they can easily do so: If the COM
palv had no means or credit which would en-
able them to place Il new obligation on the mar
ktt there would be force in the position. But
no such inability is or-po>>iLly can be pretend
ed. Can it he said that Il railroad company
makes no net profits in Il year in which it gains
s;1'.oD and has only $4,000 to pay out. because
ii ows :Sl.IoNOo, payable in four years, abund-
anly secured upon its property. when the COM
i'ahy has perfect credit and abundant means
to enable it TO replace the Old with Il new loan
on advantageous terms: Does a merchant who
carries on business partly on borrowed capital,
earn no profits in wear at the cud of which,
t1t h., has al
-, 900 more than all he has paid out. simply
because he owes Il debt for his borrowed tap-
tai which he has abundant ability to paw but
not without further borrowing. Says Noru-
tret=. Cor. 4D): LIN asrertaning whether
company has Il surplus which may be divided
among the shareholders, permanent improve
ntcits made by means Of borrowed money may
often be vaInc' rs rountcr-halancmg the iiabi-
~ OF the company for the money used to con-
struet them.
The eases are relied for the respondents
neither of which appears TO lis as having any
tendency 10 support their general position.
bnc Is h"f""S rs. RochrStrr Ry. Co., 4 Abb.
Pr. \. s., l01. That ease shows that two sets
of railroad directors We're chosen, and Il con-
troNer>y was going on between them as to
which was the legitimate board. Pending that
litigation common SharehoI,lcr-there was no
preferred Stock-brought Il bill to have all the
moncycd assets of the corporation distributed
among the stockholders. There were S:.6.OOO
in government bonds on hand. the debt was
S'o,o)o, due III seventeen wears. the annual rN-
pcnsc> were about SlO,0D. and the bill. which
was 'lemurre'l to. did not alleye whether there
was amy annual balance of profits or not The
court. amongst other grounds of decision,
said. that no breach of any obligation on the
part of the company to the Stockl oldcrS. nor
any omission of duty. was ALLEGED: that the
acts of directors should not he Interfered with
by courts except to prevent injustice; that the
corporation could make no dividends, and the
directors were not Il party to the bill: that
there was nothing to indicate that the money
on hand was not needful for the security of the
creditors OF the company; that it was not even
alleged that the directors had refused to make
a dividend, nor stated that one. in Justice
ought to be made; and the bill was dismissed
The other ease is New York. Lake Erie Il
Western X. II. Go. vs.. Nichols, lately deter
mined in the supreme Court of the United
States, reported in 10 Fed r., SO. The case
was first decided in the circuit court. 81 Blatcll
Ia, where it was held that the company could
not, against the interests of preferred stock
holders. divert Il large quantity of funds from
them to other uses of the Company, The de-
cree was reversed in the upper court, not for
amy difference between the two tribunals :S to
the law OF the ease, stated by the Judge be-
low. but upon difference of opinion in max
Ing an application Of the law to the facts. The
points OF the case are correctly represented by
the hcad-notes which are as follows: '.The
holder of preferred stock is not entitled alb
solutely to Il dividend, even if there he ..nct
earnings from which such Il dividend might
be paid. The directors may use the met earn
ings" for the Improvement of the road, where
such improvement is shown to he impcratvclv
necessary to the preservation of the corporate
property, and the continuance of the corporate
business" The court We're deeply impressed
with the uncontra,lictcd testimony of the presi-
dent of the company, that ''but for using the
funds in question in that ease, the company
could not have paid its fixed charges, but
| would have again gone into bankruptcy, and
the entire interest of the stockholders been
destroyed.' That is unquestionable doctrine
Preferred stockholders are not to be protected
TO the extent of endangering the rights of
creditors, or of wrecking or cripplimg the en-
terprisc of the road. Clark Stock. 27l. ('ul-
rer .. REM. de-, Co., ~ Penn. ST., 3G7.
The condition of the railroad above alluded
to, the Erie system, illustrates the falacy of
the claim that all the earnings of Il railroad
corporation should be withheld from stock
holders until its debts are paid. That Company
has capitol of over u million of common and
preferred stock, and an Indebtedness exceeding
100 million of dollars, secured and unsecured.
The court need not have troubled itself over
the difficulties presented in that case, if it had
had the courage to assume that the preferred
stockholders were not entitled to dividends